October 18, 2011--Fannie-Freddie

For years I've been hearing from Republican friends that the root cause of the 2008 financial collapse were the mortgages Fannie Mae and Freddie Mac made during the Clinton years to low-income home buyers.

In other words, according to the GOP talking points--(1) don't blame Wall Street and the likes of Goldman Sachs; (2) don't blame Republicans; and above all (3) do blame those low-income types who shouldn't have been buying homes in the first place.

In regard to number 3, also make sure you understand who those low-income people were--minorities. You know that Clinton, he and his fellow liberals couldn't stop themselves from pandering to those black folk and Hispanics, probably half of whom were illegals.

Since I didn't have enough facts before me, when confronted with this critique of Clinton, Freddie, and people of color, I mumbled something like, "This doesn't sound right to me." On both sides of the argument we had our opinions but not much evidence to back them up.

Now I do.

Part of the conservatives claim has been that the collapse of the sub-prime mortgage market was precipitated by people with Freddie-originated mortgages who overwhelmingly defaulting and that this then brought about the implosion of the derivatives-based house of cards. They also asserted that those who got their home loans through private sources--banks--defaulted at a much lower rate than the low-income Fannie people and thus should not be blamed for the crisis. Further, is was and is argued by Wall Streeters and Republicans that the Fannie mortgages made up the bulk of the total mortgage pool and, as a result, the loans to low-income people disproportionately contributed to the meltdown.

Wrong on all counts.

Here are the facts--

In regard to the Fannie-Freddie portion of the mortgage market it is important to note that they are of two types--those initiated by them and those that are made by banks that are then secured by F-F. So, to conflate both kinds and to attribute all of them to low-income borrowers is to dissemble.

But, even having said that, when the riskiest mortgages were made during the 2000s, Fannie and Freddie were under political attack because they were riddled by scandals and thus they remained largely on the sidelines. As a result, both their original and securitized mortgages in dollar terms declined as a percentage of the total pool. For example, between 2003 and 2007 (George W. Bush years) while overall mortgage debt grew by 11.9 percent a year, the portion funded by both types of F-F loans grew by "only" 7.6 percent.

And then about those default rates that brought things crashing down. It was largely caused by the private, bank-initiated loans, not Fannie and Freddie mortgages.

Specifically, the rate of delinquencies for the Fannie-Freddie mortgages in 2004 was 4.3 percent whereas the bank loans had a rate more than three times that--15.1 percent. In 2005, the F-F failure rate was 7.8 percent compared to 28.7 percent for bank loans; and then in 2006 and 2007, Fannie-Freddie default rates reached 13.2 and 14.9 percent while those for private market mortgages soared to 45.1 and 42.3 percent.

So there you have them--the facts.